Watching European Stock Indices for a Turn

Weakness signals that selling might begin soon.

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Some opportunities are approaching for traders to take advantage of corrections in major European stock indices. This article gives an overview of three such opportunities.

European stock indices are showing negative divergence with respect to their counterparts in the United States. There also are other signals that the US markets are overextended and may be tracing out top formations. Now we are watching the US Dollar Index and US Treasury bond futures for signals that would agree with the idea of stocks turning downward. A market correction, when it comes, should have indices on both sides of the ocean facing the same direction.

A trader familiar with Elliott Wave and other technical analysis methods can see the structures we are watching on charts with a weekly time frame. With the German DAX Index (INDEXDB:DAX), an analysis of cycles from the 2009 low suggests that a peak should occur soon. It is not yet certain whether that peak will be a higher high or will be a retrace (lower high). If it is to be a retrace, then price should respond to the area near the Fibonacci 0.764 retrace or the 7/8 retrace levels shown.

The Euro Stoxx 50 Index appears to be losing upward momentum faster than the DAX. It is currently in an acceptable area for a retrace to finish, if a retrace is the plan. In addition, the Elliott Wave count proposed here is consistent with a top formation. (This is not conclusive for a bearish outlook. We have not yet seen confirmation of a lower high and lower low, but we are watching for confirmation to develop on smaller timeframes soon.)

The London FTSE chart on a daily time frame shows what is probably the cleanest count of five waves down from the May high, followed by a nice-looking retrace. The resistance area between 6612 and 6707 should be watched closely. However, even if FTSE breaks through resistance, it still could be making a b-wave high, to be followed by a sharp downward c-wave to the area around 6000 or lower.